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Banks in India can be broadly classified under two heads—commercial banks and co-operative banks. While commercial banks (nationalised banks, State Bank group, private sector banks, foreign banks and regional rural banks)
account for an overwhelming share of the banking business, co-operative banks also play an important role. Initially set up to supplant indigenous sources of rural credit, particularly money lenders, today they mostly serve the needs of agriculture and allied activities, rural-based industries and to a lesser extent, trade and industry in urban centres. Co-operative banks have a three tier structure—
(i) Primary Credit Societies-PCSs (agriculture or urban),
(ii) District Central Co-Operative Banks-DCCBs, and
(iii) State Co-Operative Banks-SCBc (at the apex level).
UCBs: Primary credit societies (PCSs) in urban areas that meet certain specified criteria can apply to RBI for a banking license to operate as urban co-operative banks (UCBs). They are registered and governed under the co- operative societies acts of the respective states and are covered by the Banking Regulation Act, 1949—thus are under dual regulatory control. The managerial aspects of these banks—registration, management, administration, recruitment, amalgamation, liquidation, etc. are controlled by the state governments, while the matters related to banking are regulated by RBI.
Traditionally, the area of operation of the UCBs is confined to metropolitan, urban or semi-urban centres and caters to the needs of small borrowers including MSMEs, retail traders, small entrepreneurs, professionals and the salaried class. However, there is no formal restriction as such and today UCBs can conduct business in the entire district in which they are registered, including rural areas. Well managed primary UCBs with deposits of over Rs. 50 crore are also allowed to operate in more than one state subject to certain norms.
As they are covered by the RBI Act, 1934 (2nd Schedule) they have certain rights and obligations—rights of obtaining refinance and loans from the RBI and obligations such as maintenance of cash reserves, submission of returns to the RBI etc. Presently, there are 29 UCBs.
DCCBs & SCBs: As their names suggest, they operate at the district and state levels. One district can have no more than one DCCB with a number of DCCBs reporting to the SCB. They were under supervision of the RBI—later on this function was delegated to the NABARD.
Co-operative banks play a very vital role in India’s financial system they have been faced with certain long-drawn problems also—we may have brief look them:
• Regulation remains the biggest issue as they are under dual regulatory control—the UCBs come under the RBI and the Registrar of Co- operative Societies (RCS) of the respective states while the DCCBs and SCBs come under the NABARD, the RBI and the RCSs. Given the close links between politicians and co-operatives and the fact that the RCS functions under the state government, in practice this dual (or triple) custody of the co-operative banks has, in practice, led to poor supervision and control. Besides, most co-operative banks are lacking in skill and expertise.
• Recruitments are politicised as are appointments at most levels.
• Income recognition and prudential norms that were introduced for commercial banks in the early 1990s (under the process of banking reforms) are still to be this sector.
Co-operative banks have been in news mostly for fraudulent deals. Due to multiplicity of regulatory control of the federal nature it becomes really difficult to comply these banks to the prudential norms. Meanwhile, the Government of India decided (in the Union Budget 2017-18) to bring the co- operative banks into the ambit of the ‘core banking’ structure. Under the core banking solution (CBS), customers are able to avail banks’ services across all of the branches rather the branch where the account is—making them customers of the bank rather than of a branch.